Budgeting tips when a pay rise cuts your benefit

While transitioning off the welfare system can be difficult, a financial advisor warns people about getting too comfortable being on the benefit.

With the Government’s families package increases on the horizon, Working for Families has been called into question.

In one case a solo mother of three who took on extra hours and received a $16,000 pay rise, triggered a decrease in her Working for Families tax credit, leaving her not much better off.

Before the pay increase, Sue would get about $911 a week in the hand, including the supplement and tax credits. In the new job, she was left with $962. Both figures include child support received.

Financial expert Liz Koh said the welfare system was designed to give assistance to fill a gap, but ideally people should strive to fill any income gaps themselves.

“You can’t take your welfare benefit for granted and think it’s going to work on top of your income. It’s only there to fill a need and everyone should be taking care of themselves,” Koh said.

“I don’t think anybody would think it’s appropriate if someone on the government benefit is going on overseas trips. That’s not what it’s meant to do.”

Work and Income provides the child care subsidy to anyone with a gross weekly income below $1400. The solo mother’s new job moved her into a new pay bracket, reducing her child care subsidy by $43 per week.

Careers advisor Chris Eilers said the benefit disincentivised families from making career progressions because of their eligibility.

He said people were willing to be paid under the table to continue receiving tax credits.

“Some people get too comfortable, but in other cases, people loathe being on the benefit because they feel they’re being seen as a second class citizen.”

Taxpayer Union director Jordan Williams said the Working for Families tax credit created a “welfare trap” in the high welfare, high tax regime.

“The shock comes when you do a back-of-envelope calculation. People apply the tax rate but often greater than that is the reduced tax credit, leaving people worse off.”

Koh said the key to coming off the welfare support net was budgeting.

“It’s tough for some people, but if you manage your money carefully you can get by.

“You won’t be able to save during the transition but your situation doesn’t last forever. There are times where you just have to get by.

“So long as you’re not going in debt then that’s fine and eventually you’ll get to a stage in life where you are able to save and go on holidays.”

Koh recommends breaking your finances into three categories, essentials, discretionary and household costs.

She said the easiest areas to cut back on spending was the food and subscriptions bills.

“Cut back your financial commitments to the absolute bare minimum. Avoid any unnecessary subscriptions, Netflix, Sky, Spotify and then take a look at your food budget.

“At the end of the day it’s a trade off, cut back on food to enable your kids to join a sports group.

“Typically families will spend $200 to $300 on food every week, so if you can cut back even 10 per cent of that you can save $20 to $30 a week.”

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